PROFIT AND CASH FLOW ANALYSIS
higher sales price. And fixed operating expenses should not be affected by the higher sales price. Frankly, a 10 percent increase in sales price with no increase in the product cost and no increase in the other expenses of the company is not too likely to happen. It is presented here to illustrate the powerful impact of a sales price increase and to contrast it with a 10 percent increase in sales volume (see Figure 10.2 again). Also, I should mention here that the cash flow impact of a 10 percent sales price increase differs from that of a sales volume increase like day from night (see Chapter 13). WHEN SALES PRICES HEAD SOUTH
Like it or not, business managers sometimes have to cut sales prices just to hang onto the present sales volume they have. They know that profit will suffer, but competitive pressures force them to cut sales prices, at least temporarily. Or they decide to cut prices to boost sales volume, but the number of units sold in fact remains the same, and later they have to nudge sales prices back up to previous levels. A 10 percent sales price cut would be the negative mirror image of the effects caused by the 10 percent sales price increase. Just put negative signs in front of the changes you see in Figure 10.1. If this happened, all the profit and then some would be wiped out on the generic product line, over 90 percent of the profit on the standard product line would evaporate, and the business would give up over 69 percent of its profit from the premier products. To illustrate the serious profit damage from even a relatively small decrease in the average sales price of products over a period of time, assume that during the year just ended the business had to cut sales prices at times during the year such that, on average, the sales prices of the products sold in the three product lines suffered by 4 percent. This may not sound like too much of a catastrophe, but look at the results shown in Figure 10.3 for this scenario. Sales prices and sales revenue drop by 4 percent, but profit plunges from 28 to 43 percent, depending on the product line. The reason for the lower drop in profit for the premier product line is that the unit margin of these products is a much larger percent of sales price, so a 4 percent cut in sales price doesn’t take such a big bite out of the unit margin. For
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